Euro falls on uncertainty over Spain bailout

Lack of details about Spain’s bank aid, fears about Greece weigh

DeborahLevine

NEW YORK (MarketWatch) — The dollar turned up against the euro on Monday on lingering worries about Greece and the lack of details about Spain’s weekend bank bailout.

The euro
EURUSD, +0.0353%
briefly fell below $1.25, then traded at $1.2495, compared with $1.2512 late Friday in North American trading. It rose as high as $1.2657 during the European session.

The dollar index
DXY, -0.06%
which tracks the U.S. unit against six major currencies, turned up to 82.529 from 82.439 late Friday.

The euro’s earlier gain followed news that Spain would ask the European Union for as much as €100 billion ($125 billion) in loans to help its banking sector, slightly easing jitters over the continuing euro-zone crisis. Read about Spain’s bailout.

“Spain’s willingness to accept a bailout and the swift offer from euro-zone nations indicate that there is enough political will in the region to provide assistance where it is needed,” said Kathy Lien, director of currency research at GFT.

“The euro is struggling to hold on to its initial gains because the Spanish bailout leaves many unanswered questions such as which bondholders will be subordinated,” she said.

Other details left unclear include where the bailout money will come from -- which will affect where bondholder the losses come from, Lien said. Spain isn’t expected to have to commit to anymore austerity measures since the funding was needed to recapitalize banks, but banking reform may be part of the deal. Read more on Spanish bank deal.

All that won’t be clear until later this month, Lien said.

Several analysts pointed to further risks on the horizon, including Greece’s coming election that could determine whether the nation remains in the euro zone.

“In the near term, [the euro] will remain buoyed, but any gains will be restricted to technical resistance around the $1.2690 level, where we expect sellers to emerge, especially given the uncertainty surrounding the outcome of Greek elections this weekend,” Crédit Agricole said in a note Monday.

The euro has lost 3.4% against the dollar this year due to the simmering sovereign-debt and financial problems. But it’s clawed back 1.1% this month after hitting its lowest level in almost two years.

Analysts are also already looking at whether Italy and even France will come in the cross hairs next, which raises the appeal of a broader euro- zone debt solution instead of individual bailouts. One of those may be a form of jointly backed debt similar to euro bonds. See story on euro bonds.

Money flowing out

Another strain on the euro will be the continuation of money flowing out of the region as investors just get too jittery, said Nomura analysts.

Research the firm released Sunday pointed to capital flows as a source of worry, citing what it said was evidence of capital flight that could force the euro back down “in a dynamic resembling a traditional emerging-market currency crisis.”

The presence of such outflows, the Nomura analysts said, “opens the door to much more pronounced euro weakness, if it continues. Policy actions in the next three to four months will be crucial.”

The British pound
GBPUSD, -0.0537%
pared gains to $1.5504 from late Friday’s $1.5464.

Against the Japanese yen, the dollar
USDJPY, -0.02%
bought 79.45 yen, reversing earlier gains and compared with ¥79.49 at the end of last week.

China was also on investors’ minds, after the country released a round of mixed economic data over the weekend. The data showed industrial production and inflation cooled off, while exports and imports exceeded analysts’ expectations. See more on Chinese data.

“While the trade data were robust, weak industrial activity and low inflation give the PBoC [the People’s Bank of China] enough space to ease monetary policy, which should support the ‘green shoots’ that emerged in May,” analysts at Barclays wrote in a note. “This should help demand for commodities and commodity currencies, such as the Australian dollar and Norwegian krone in G-10.”

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